Governments paying price for ‘do it now or die’ approach to reform

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Flavio Menezes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

The move to challenge the leadership of Prime Minister Tony Abbott, coming soon after the shock Queensland election outcome, has in some quarters been blamed on a lack of appetite for reform on the part of voters.

But linking voters’ dissatisfaction with a lack of support for well-thought-through reforms is likely a mistake. An alternative hypothesis is that voters are sceptical of the notion that we have a budget emergency or that we need urgent reform. Instead, voters may understand that the challenges we face as a nation are structural in nature. As a consequence, they reject band-aid or piecemeal approaches that can do more damage than good.

We are a small, resource-rich, open economy and the reality is that the US and European monetary policies, and what happens to the Chinese economy, are likely to have a much larger influence on the Australian economy than pursuing further microeconomic reform or industrial relations changes.

Our existing, strong economic institutions and structures (for example, floating exchange rate, independent central bank and low tariffs) are already working to ensure the economy adjusts to the end of the mining boom. A lower Australian dollar will lead to structural changes as industry and the services sector become more competitive and capital and labour resources are released from the mining industry.

To be clear, there is, of course, a role for reform that increases the economy’s flexibility and this is not a call for inaction. Instead, this suggests that rather than being a “do-it-now-or-die” proposition, a key role for reform is to facilitate the transition to lower terms of trade and to reduce the cost of the transition to society, such as temporary unemployment, as much as possible.

Intergenerational issues

We face some other significant challenges over the next few decades. As acknowledged in the 2010 Intergenerational Report (the overdue 2015 report is expected before the end of this month), our economy is particularly vulnerable to the impact of climate change. As in other developed countries, our population is ageing, which will have long-term implications for taxation, public spending and the labour market.

These structural changes induced by lower terms of trade, climate change and the ageing population necessitate structural rather than short-term measures. Therefore, it is reasonable for voters to expect more comprehensive tax and welfare system reform beyond measures that disproportionally target the less well-off and fail simple fairness tests, as was the case with the last budget. It also suggests voters may be willing to listen to meaningful arguments for further micro reform, including privatisation, related to the role governments are best placed to play in society.

This includes, for example, whether the government should exert control over companies that provide public services such as electricity or water through ownership or through regulation. The recent election results in Queensland and recent opinion polls in New South Wales suggest voters may favour more substantive arguments about privatisation, which is largely the case in New South Wales, over the gimmicks and dumbed-down public relations campaign in Queensland.

Other recent opinion polls provide further evidence that voters understand the structural challenges Australia faces, and that responding to these challenges may require a more comprehensive agenda. For example, according to a recent poll, more than half of respondents agree that the federal government needs to reduce Medicare costs, but only a third has confidence in the government’s approach.

The main task for both sides of politics now is to create a positive agenda beyond three-word slogans. Crucially, politicians will need to credibly articulate to the public how this agenda can smooth the transition to an economy that will be less reliant on the exploration and export of minerals, less carbon-intensive, can support an ageing population and the associated increases in medical costs and welfare payments even with a reduction in the tax revenue base, and still be subject to the vagaries of the world economy.

Such an agenda would necessarily be broad and long-run in nature given the need for politicians to build public consensus around key messages.

Rethinking government spending

This agenda should include cutting-edge ideas on how to improve the business of government. This involves doing more (providing more services) with less, which goes beyond the 1990s reforms where Australian governments would contract out to the private sector goods and services that were previously provided in-house. Instead, the focus should be on using ideas on how to design markets, to change the way government procures goods and services and allocates resources.

The impact of this type of reform should not be underestimated. Government spending accounts for over 30% of the total value of the goods and services produced.

A positive policy agenda would also incorporate well-known remedies such as increasing the economy’s ability to respond to shocks such as revisiting industrial relations to ensure the right balance between workers’ protection and flexibility, and eliminating or replacing inefficient regulation.

The agenda should also include a more robust framework for investment in economic and social infrastructure. This encompasses greater transparency in the selection of major projects to avoid perceptions of pork barrelling, and more investment in institutional knowledge on the design of public-private partnerships to take advantage of international experience and new ideas emerging from the field of market design. There also needs to be continued improvement on the regulation of infrastructure assets to ensure businesses in natural monopoly industries invest efficiently and deliver quality services at reasonable prices. It should also encompass a clear indication of how carbon will be priced so that investors’ uncertainty is reduced.

Finally, any positive agenda needs to include a comprehensive review of the efficiency of the taxation and welfare payment systems. This includes looking at the possibility of replacing tax exemptions and concessions, such as those on superannuation, capital gains, and imputation credits, with a flat tax on savings. Other agenda items should include revisiting the GST rate and coverage, redesigning welfare payments to make them more efficient in providing the right incentives for people to look for jobs, to look after their own health, and to pursue more education.

The earlier the major political parties promote a long-run agenda, the earlier they will restore the public confidence in politicians and the policy process.